Fleet Car: Life in the fast lane

The German firm is aiming for nothing less than being the world's biggest carmaker.

by Andrew Saunders
Last Updated: 09 Oct 2013

And with its super-efficient platform-sharing technology and a deal with Suzuki to open up Asia and India, it has a good chance of succeeding. Just so long as it can keep up in the race to make a truly mass-market alternative fuel vehicle.

If you wanted a case study for a textbook post-recession return to form, you could do a lot worse than look at Volkswagen. Barely three years after the financial crisis struck and the bottom fell out of the US and European car markets, the German firm famed for dependable motors such as the Golf and Beetle - plus more upmarket Audis, Bentleys and Lamborghinis - is enjoying unprecedented prosperity.

Despite suffering - like the rest of its industry - a massive fall in sales in 2008-2009, last year Volkswagen Aktien Gesellschaft (to give it its full monicker), headquartered in Wolfsburg, Lower Saxony, shifted nearly 7.4 million vehicles, taking 12% of the global passenger car market and making it Europe's largest carmaker by sales. After years of being dominated by the proletarian products of Ford and GM, the league table of Europe's bestselling cars is now headed by the classless VW Golf.

Its performance in the first half of this year has been hardly less supercharged, with record sales of getting on for EUR80bn, thanks in no small part to the alacrity with which the Chinese have taken to the group's premium products. Audi's svelte saloons, coupes and convertibles are now the cars in which the emerging Chinese mass wealthy wish to be seen.

Having blown GM and Ford into the weeds and established a solid presence in emerging markets, Volkswagen is now on track to overtake even the mighty Toyota to become world number one by this time next year. Vorsprung Durch Technik, indeed.

No less remarkable has been the transformation wrought on the firm's margins, for many years a bone of contention between VW and some of its more vocal shareholders. Between 1990 and 2006, VW's average margin was around 2.3%, one of the lowest in the industry. But this year, with first-half profits of nearly EUR6.5bn, they're up to around 12% - for now at least.

The weak euro has certainly helped VW (and other German manufacturers) fill their order books by making their products cheaper overseas. As VAG chief executive Martin Winterkorn has put it: 'The ongoing strong demand in strategically important markets is providing a tailwind, while our large number of new models is giving us an additional boost.' But the euro crisis and flagging German growth figures may make for a bumpy road ahead.

Even in the notoriously hard to crack fleet market, where brand values count for little against ubiquity and whole-life costs, VAG has been making major inroads. The all-conquering Golf is now a regular in the top five fleet sellers, while Audi's A4 and A6 models are taking the fight to BMW and Mercedes among executive user-choosers. And the group's more middlebrow brands, Skoda and Seat, are also doing much better, posting decent if not stellar sales in private and fleet markets alike.

But, despite the apparent speed of the turnaround, VW's success is the result of a very consistent strategy, painstakingly executed over the course of several decades. That strategic consistency is helped by VW's ownership and management, and the inherently long-term outlook of German corporate culture. For better or worse, it couldn't happen here - the City would have sold off or broken up a British Volkswagen years ago, impatient for a faster return on its investment.

The secret is, there is no secret, says design critic and MT contributing editor Stephen Bayley, who believes that the group does so well because of its investment in 'tangible, physical quality. A good quality product sells better, and VW products are superior aesthetically and technically. No one has ever gone to sleep dreaming of one day owning a Toyota,' he observes.

At the heart of the VW story is the group's multiple brand portfolio, which thanks to platform-sharing enables it to produce a wide range of vehicles at differing price points and in different body styles, from a handful of mechanical underpinnings. So whether you're tempted, for example, by a VW Golf or Scirocco, Audi A3, Seat Leon or Skoda Superb, beneath the skin they are all based on the same chassis, powertrain range and running gear. It's an approach which dates all the way back to the first VW Golf of 1974, and it reduces inventory and costs, and speeds up product development.

Platform-sharing is now the industry standard and although it is not without its risks (design faults at a platform level, for example, can proliferate into many different models if they are not spotted early), few manufacturers have used it to as much advantage as VAG. 'They have been successful with their big brands. I have a lot of respect for what they did,' Luca di Montezemolo, chairman of Fiat and head of Ferrari, said of the VW strategy in a newspaper interview last year.

VW's 'brand ladder' is also (by car industry standards) hugely capital efficient, allowing the last drop of revenue to be squeezed from its investment in each successive generation of technologies. So the top of the range Audi A8 gets the latest construction techniques, powertrain and in-car toys and gadgets, but in 10 years' time the same kit will still be making money, having descended the ladder to feature in lesser Skodas and Seats.

Even so, when the firm declared four years ago it intended to overtake Toyota as world number one by 2018, it looked a tall order. But now it may happen as soon as 2012 (partly because of the disruption caused to Toyota production this year by the Japanese earthquake and tsunami). 'VW is indisputably a powerhouse and looks set to remain very profitable,' Max Warburton, an analyst at Bernstein Research told clients in a note recently.

Crucial to the group's long-term future is its deal with Suzuki - VW acquired a 19.9% stake in the Japanese small car maker early last year. Platform-sharing with Suzuki would give VW a much-needed boost in the budget segment in Asian and Indian markets where it's currently struggling. But the details of exactly how the two firms will co-operate are still to be thrashed out. There have been suggestions that cultural differences between VW's all-German management team and their Japanese oppo's at Suzuki may lead to slow progress.

The VW factory at Wolfsburg opened in 1938. It produced Hitler's people's car (Volkswagen), the Porsche Type 60, later to become known as the VW Beetle. Despite this unpromising start, VW prospered after the war with its successive Beetle models. In the 1970s and 1980s, the company took the first steps towards its modern form, by developing a range of VW and Audi models such as the Golf and Polo and the Audi 80 and 100. The equivalent models today can trace their lineage back to these cars, both technically and in their styling.

But it was the acquisition of first Skoda, then Seat in the 1980s and 1990s which really set the seal on the direction the VW portfolio was taking. And, rather like Germany itself, which struggled with the trials of reunification at the time but is now reaping the rewards, the integration of these two organisations into the VAG stable was painful but has led on to better things, with the possible exception of Spanish-based Seat, which continues to disappoint both its corporate masters and the market. The group also owns truck maker MAN.

However, the vexed issue of the merger with Porsche remains unresolved, as does who exactly will be merging with whom. Having tried very hard to engineer a reverse takeover of VW in 2008, Porsche didn't quite get there. On the brink of bankruptcy, Porsche was forced into a merger deal with its target, a merger which both parties are still trying to complete despite numerous legal and regulatory hurdles. In the meantime, Porsche is in rude health once again, the world's most profitable car firm, with margins of over 20%.

The group's structure is another crucial part of the picture, for, even by the idiosyncratic standards of German corporate culture, VW is something of an oddity. For starters, VAG is 13% owned by the state of Lower Saxony, the region in which its Wolfsburg HQ is located. The state president also has a seat on the VW supervisory board and holds 20% of voting rights. It's like the leader of Birmingham Council sitting on the board of Jaguar.

VW also operates a highly consensual form of management, known as Mitbestimmung, whereby workers get multiple seats on the supervisory board and a veto on certain key areas of decision-making. Historically, this has led to complaints that it starves its shareholders to featherbed its workers, but since the financial crisis this has started to look like not such a bad idea. With a huge and growing cash pile and reasonable security from takeover, VAG can afford to invest EUR23bn in plant and product over the next three years, and a further EUR18bn on acquisitions. That will probably make this year's stellar margins a one-off, but VAG bosses may well be keen for their shareholders not to get used to such bumper returns. It is not the VW way.

Consensual it may be, but one thing VW's management is not is diverse. Male, middle-aged and German is the name of the game at the senior levels, and it's this cosiness which some blame for the biggest corporate scandal in VW history. In the mid 1990s, the firm was rocked by allegations of corruption involving lavish jollies for staff, including company-funded shopping trips and visits to prostitutes. The affair ruined the careers of several VW execs, and the firm's former chief employee representative, Klaus Volkert, was sentenced to almost three years in jail.

Perhaps the final wheel on the corporate wagon is marketing. As a firm whose first product had to overcome the reputational hurdle of official endorsement by the Nazi party, VW has always been keenly aware of the importance of marketing. Indeed, it was great advertising which helped the original Beetle crack America and sell 21.5 million units worldwide, made the Golf GTi the yuppie's motor of choice in the 1980s and turned Audi into a credible rival to BMW and Mercedes in the noughties.

Slick marketing continues to be a vital part of the mix today, but VW's greatest strength now lies in its depth. After 30 years of careful stewardship, no other large manufacturer covers so much of the market as VAG. And none can leverage both ends against the middle like VAG, whose budget brands like Seat and Skoda benefit from the reflected glory of their smarter siblings, as well as from technological hand downs. In return, the upmarket marques, Audi and Bentley in particular, are rendered enormously profitable by production techniques and economies of scale inherited from below.

Can it keep up the pace? Well, moments of disruptive change traditionally offer opportunities for new rivals to blindside established players, and the car industry is certainly changing faster now than it has for years. The need to develop brand new electric and alternative drive technologies and exploit new materials is becoming ever more urgent.

Even VAG boss Winterkorn acknowledges that the future may be more difficult for the firm than the past, but it would take a brave soul to bet against VW not only achieving, but also holding onto the top spot five years from now. You can expect to see more and more VW badges in the company car park.

1930s - 1980s: VW TIMELINE

1938: Adolf Hitler opens the first VW factory in the new town of KdF-Stadt (now Wolfsburg). Around 70,000 people attend. The company is renamed Volkswagenwerk GmbH later that year.

1944: During the Second World War, the factory turns out military vehicles and munitions, including the V1 'Doodlebug' flying bomb.

1955: Workers celebrate the production of the one millionth VW at Wolfsburg. By now the cars are selling all over the world and Volkswagen is a household name.

1974: VW causes a stir with the first Golf, designed by Italian stylist Giorgetto Giugiaro. The boxy hatchback is a huge a hit, and becomes the legitimate heir to the Beetle.

1978: The last Beetle to be made in Germany leaves the production line. Production continues in Mexico until 2003, by which time 21.5 million Beetles have been sold.

1983: Production of the second generation Golf begins. It's big in Europe but fails to capture US buyers - a market VW still struggles with today.

1990s: VW TIMELINE

1990: VW expands its brand portfolio, completing the takeover of struggling Spanish carmaker Seat.

1991: Volkswagen takes a 30% stake in Skoda. Its first joint model is the Octavia, just 6,154 of which are sold in the first year. By 2000 the acquisition is complete.

1993: VW's market share in the US sinks to a low of 0.44% as Japanese competition increases.

1998: Volkswagen loses out to arch rival BMW in a fight over the Rolls-Royce brand. But its consolation prize - Bentley - become a huge success for VW.

2009: After years of 'will they. Won't they', VW and Porsche finally announce plans to merge. But two years later, regulatory delays are still holding things up.

2010: VW completes purchase of 20% stake in Japanese manufacturer Suzuki for $2.5bn. Nearly two years later Suzuki's vice-president confirms the two have yet to co-operate on any joint projects.

2011: The VW Group now owns Audi, Bentley, Bugatti, Lamborghini, MAN, Scania, Seat and Skoda. It's Europe's largest automaker, controls 12% of global car sales and is aiming to become the world's biggest carmaker.

Find this article useful?

Get more great articles like this in your inbox every lunchtime

Subscribe

Get your essential reading delivered. Subscribe to Management Today